Virtual shopping destination

Virtual shopping destination

The first wave of e-commerce in India witnessed a spurt in travel e-commerce. The segment alone recorded a 50 per cent growth last year (2010). With the advent of the second wave of e-commerce in India during the previous decade, Indian e-commerce space saw emergence of newer formats of online shopping such as group buying sites, private sales clubs and comparison shopping platforms. This decade also witnessed considerable mergers & acquisitions with investment flowing in from some of the leading investment funds in India and abroad.

While world’s leading online marketplace–Ebay.com entered India with 100 per cent acquisition of Bazee.com in 2004, California-based Groupon recently entered the market with the acquisition of Kolkata-based Sosasta.com. In June last year, Jasper Infotech owned Snapdeal.com bought Bangalore based Grabbon, and the Gurgaon-based Smile Interactive and Group Buying Global AG, which operates sites across four continents, bought Mumbai’s WanaMo.com (rechristened as Deals and You.)

“The amount of investments this space has been able to generate in the last two-three years validates the growth potential that Indian e-commerce market holds. Online retail (excluding travel) is a Rs 800-900 crore market today and is growing at a rapid rate. Today, we have about 60-70 million internet users and in our estimate the active buyers are close to 6-8 million only, and hence we see the business to grow non-linearly in the next few years,” says Sundeep Malhotra, CEO of Homeshop 18.

Amit Bharatiya, Business Head & GM, Vizisense (a leading online audience measurement platform) states, “The e-commerce industry has been doing pretty well. It has shown a growth rate of 25-30 per cent in 2010. This growth has largely been led by services over products retail in the non-travel e-commerce segment.”

Deepa Thomas, Senior Manager, Pop Cuture, Ebay India states, “The market is growing at a healthy rate of 25-30 per cent year-on-year. Naturally, we want it to be more, but the growth recorded so far has been impressive, considering that broadband connectivity in India is still very low.”

Broadband narrow reach

So even as leading e-commerce players in India are gung ho about the growing online shopping business, what possibly are the factors that hamper fuller realisation of the e-commerce business potential?

Kunal Bahl, CEO of Jasper Infotech states, “The biggest challenge in India for development and implementation of e-commerce on a large scale is the unavailability of the internet to a larger section of Indian population. This is an acute problem since less than four per cent of the Indian population actually has access to the internet. Resultantly, businesses that aim to cater to larger chunk of the Indian population fail to have an impact in terms of catering to larger masses.”

Second important factor that limits the reach of online sellers to the consumers is a lack of faith in the security of online transactions. Bahl contends, “While it is normal for consumers in the west to shop online, Indians still prefer to pay through cash instead of revealing personal/card details over the internet.”

Thomas states, “Internet penetration in India is still low which makes it a bit scary for customers to use online payment gateways for shopping purposes. As the penetration increases, however, it will lead to richer e-commerce websites coming up.”

Online dynamics

While infrastructure related hurdles like the internet connectivity and consumer trust in online payment systems would go with time anyway, does solution to the above two guarantee success for every online business?

“Getting a pretty website developed is easy but the challenge for online shopping business is getting quality suppliers to offer products. Since India is a huge country, delivery and logistics are the biggest challenges. More often than not, quality logistics providers cannot reach the last mile and have to depend on local support which is not easy to get and difficult to monitor,” Malhotra states.

Pearl Uppal, CEO of Fashion and You, the online fashion and lifestyle retail portal from Smile Interactive states, “Nobody realises the complexities that go into the production, merchandising and supply chain mechanics of online retail.”

“We are the first online retail company in the fashion & lifestyle segment in India and we provide an alternate sales, distribution and marketing channel to high-fashion/luxury fashion brands in the world, enabling them to expand their reach in India beyond a limited number of stores in a handful of cities. It’s a business which is very easy to start but very difficult to sustain. Unless you have deep pockets, and unless you have a very strong capability in technology, production, merchandising and supply chain, I wouldn’t suggest one should go for it. It is not a business where you can invest little amount of money and wait for the profits to flow in. One needs to be patient enough to continuously invest money for two to three years to start the scale,” Uppal further states.

“Ebay is an online marketplace and we do not retail as such. We create platforms for thousands of entrepreneurs who get their items listed on Ebay to sell to customers worldwide. While the inventories and shipping are taken care of by the sellers themselves, Ebay ensures that the buyers and sellers receive best marketing leverage. It is a profitable business model since inventory management and deliveries do not form the part of our costs. We do, however, invest substantially in account management,” Thomas at Ebay states.

Bahl concurs, “E-commerce portals help vendors to acquire immense reach, as opposed to a brick and mortal model of retailing. It is extremely cost-effective, given that the infrastructure and manpower costs can easily be optimised. Also, communication to the prospective target group becomes much more targeted, easier and cost effective.”

Bharatiya of Vizisense shares, “For an e-commerce business to be successful in India, it must differentiate on at least one of the three facets of retailing. Either it should offer high convenience (IRCTC and other online booking portals), price advantage (group buying sites) or, great choice of products.”

Products vs services

Coming back to what Bharatiya stated in the beginning – the growth in e-commerce in India is largely led by services over products retail, well demands explanation.

“When it comes to product retailing, we need to understand that the distribution system in India is pretty flat and the margins available to vendors are really low. As a consequence of a low-margin structure, it becomes difficult for the retailers to offer great price-advantage to the consumers. Thus, the value-perception of the whole online deal (for the consumers) goes down,” Bharatiya explains.

“Hence, a customer would prefer buying a mobile phone from a retail store, if the discount offered online is only Rs 200-300. This on the other hand, may be the margin a retailer might receive on the mobile phone himself,” Bharatiya further elaborates.

Bahl of Snapdeal.com avers, “The Indian consumers are yet to accept online shopping and spending as an alternate shopping platform. Barring a few categories like air travel, most of the categories are still trying to convert offline customers to buy on online platforms.”

The most popular categories selling through online shopping platforms according to Bharatiya are books and music followed by mobile phones. Malhotra informs that mobiles, electronics and consumer durables followed by books and clothing constitute the major categories selling online, and on television for Homeshop 18. For Ebay.com, jewellery sells every four minutes while mobile sets sell every five minutes according to Thomas. For Snapdeal.com, however, F&B and health & beauty services form the major chunk of the sales.

“In services retailing, like that by Snapdeal.com, Deals and You, Groupon, etc, the margin structure is pretty high. Thus the discounts offered to the consumers are over and above the profits extracted by the online retailer,” Bharatiya explains.

Brand value

So, does it mean that online products retailing in India is a difficulty, and even if it is, why do we see popular retailers like Marks & Spencer and Tesco thrive online in the developed markets?

Bharatiya states, “Marks & Spencer and Tesco are established in the offline retail categories. The hypermarkets/supermarkets in India have just come in the last decade. In 2011, however, you will see lot of hypermarkets/ supermarkets do a lot of stuff online.”

“Online is a great way for showcasing new products/categories and to take care of the excess inventories. Tesco, Walmart and other international retailers have made a best use of e-commerce for the same,” adds Bharatiya.

Thomas asserts, “Modern retail format in India itself is so new that businesses are still focusing on brick-and-mortar stores. However, on Ebay we have had a fair amount of savvy marketers who were keen to set up online stores. Brands like Reebok, Dell, Huggies, Biba, Samsung, etc have partnered with us at some point of time to set up online stores and reached out to larger masses.”

Assuming that established brands in the physical retail space find it easier to launch online, does it mean that brand value plays an important role in the success of a vendor on online portals?

Malhotra states, “We have observed that if an e-commerce portal is selling standard or branded products at a lower price than an offline store, consumers often